Employers Beware – Provision in Employment Agreement Requiring Binding Arbitration May Be Unenforceable
Arbitration agreements in employment agreements may not be enforced, absent special care given by employers when hiring employees.
Employers in California are often faced with lawsuits brought by employees for alleged Labor Code violations. The general perception is that plaintiff employees have a greater chance of obtaining a sizeable recovery against an employer in a jury trial.
The concept is that juries are made up of citizens that are more likely than not to be employees themselves. As a result, there is a preference among employers to avoid having their issues with employees resolved by juries. One potential alternative to resolve such claims is to require binding arbitration.
In Wisdom v. AccentCare, Inc. (Jan. 3, 2012) 2012 DJDAR 105, several employees filed a lawsuit against their employer, AccentCare, Inc., alleging that they were not paid for all of their overtime work. In conjunction with their employment, four of the plaintiffs had signed acknowledgment forms when they applied for employment that included a binding arbitration agreement. The plaintiffs did not negotiate these terms and the terms were not explained to them.
In response to plaintiffs’ complaint, AccentCare brought a motion to compel arbitration of the claims, relying upon the arbitration clause in the employment contract. The trial court denied the motion to compel arbitration, finding that the arbitration provision was both procedurally and substantively unconscionable.
The Court of Appeal in Wisdom upheld the ruling of the trial court, finding that an arbitration provision imposed on employees as a condition of employment, and without the opportunity for negotiation, is adhesive. As noted by the court, in the context of an individual seeking employment, there exists unequal bargaining power between the parties. Moreover, there was no evidence of any negotiation regarding the terms of the agreement between the prospective employee and the employer. Also, there was no indication that the existence of the arbitration clause was brought to the attention of the prospective employee. For these reasons, the arbitration clause was found to be procedurally unconscionable.
The court in Wisdom also noted that the arbitration provision at issue was procedurally unconscionable because it did not create mutual obligations as between the parties. In that regard, under the terms of the arbitration provision, only the employee was agreeing to submit claims to arbitration. For these reasons, the arbitration provision was found to be unenforceable by the employer.
The decision in Wisdom is consistent with prior decisions in California holding that, except in rare circumstances, a binding arbitration provision contained within an employment agreement will generally not be upheld by courts.
In order to make the strongest showing for enforceability, an employer needs to:
Direct the prospective employee’s attention to the arbitration clause;
Request that the prospective employee review the arbitration clause and ask as to whether the prospective employee wants to make any modifications to the arbitration clause;
Allow the employee to strike the arbitration clause while still affording the employee the opportunity to obtain employment; and
Include language in the arbitration clause which clearly indicates that it is mutually binding as to both the employee and the employer.
As a practical matter, under circumstances where an employer has a high volume of employees, for the most part, the employees are not in a position to dictate the terms of their employment. As a result, a binding arbitration provision contained in an employment agreement will likely be found to be unenforceable.
The most probable exception is a situation where a prospective employee is a highly sought after skilled employee that, with the assistance of counsel, engaged in detailed negotiations regarding the terms of the employment relationship. In Wisdom, those factors were not present and therefore the court found the arbitration provision to be unenforceable.
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